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Post-bankruptcy Detroit to keep defined benefit pension plan

There were plenty of moans and hand-wringing in the fallout of Detroit's plans to change its debt structure Friday in the nation's largest municipal bankruptcy — but the biggest bombshell may be what doesn't change.

A post-bankruptcy Detroit will maintain a defined benefit pension plan for more than 9,300 current city employees, as it has for decades, and that could be the leverage it needs to persuade retirees to approve the new plan over objections by other creditors.

Keeping a defined benefit plan for current employees runs counter to a trend among businesses and government agencies, which have been generally shifting toward defined contribution plans since the 1990s.

Oakland County, for example, converted to a defined contribution pension plan for its employees about 20 years ago, and Macomb County expects to put all new hires into a contribution plan starting in 2016.

Detroit Emergency Manager Kevyn Orr's communications director, Bill Nowling, said Friday that other modifications to the defined benefit plan should keep its costs under control, without a more drastic change.

"Generally, the city is confident that, with more conservative actuarial assumptions and management and no addition of new employees or continued COLA adjustments, the (plan) funds can perform at a level that will not increase unfunded liability," he said.

For example, the plan calls for the Police and Fire Retirement System to assume returns of no more than 6.5 percent and the General Retirement System that covers other city employees to assume a return of no more than 6.25 percent. Pension plan terms also cannot be changed for 10 years under the city's plan of adjustment, if it is confirmed.

Nowling in an email said the city expects to stop new employees from joining the defined benefit plan or vesting into it at some future point, but did not elaborate.

Kriss Andrews, a former CFO for the city during the Bing administration who went on to co-found Southfield-based Alderney Advisors LLC last year, said he did not expect the continued support for a defined benefit plan.

"That was the most surprising thing I saw so far in the plan today," he said Friday. "You don't ever know what happened behind the scenes, and I sure don't know, but it may very well be that asking for that (a plan conversion) was just too much. Too much for the union to swallow, or too hard to execute. But I'm still surprised they didn't go to a (contribution) plan."

Assumed assistance

The pension plan still requires funding from the state to meet the $820 million needed to fund pension obligations to an acceptable level.

Orr said Friday that he is hopeful state officials will provide the missing $350 million piece of the funding puzzle to help cover pension fund liability for roughly 22,000 retirees — over and above the $370 million to come from private foundations and $100 million that a privately managed Detroit Institute of Arts expects to raise from donors over the next 20 years.

The DIA will ultimately contribute $175 million to help cover unfunded liabilities for the police and fire pension plan and $50 million to the general employees' plan by the end of June 2023, out of funds pledged by various foundations and from donor contributions.

It would contribute at least another $195 million to the general employees sometime after that, according to provisions of the plan of adjustment submitted Friday before U.S. Bankruptcy Court Judge Steven Rhodes.

The plan also calls for the pensions not to pursue any claim against the DIA artwork as a city asset.

Orr told reporters Friday that the funding bargain requires a "global agreement by all sides," and if retirees choose to go after the artwork as a city asset then that money is off the table.

"That money (for pensions) has to come from somewhere, and hopefully when the parties get a chance to talk further about it, they (retirees) will consider the alternatives," Orr said. "I would certainly expect, if we reach agreement with either of the funds, they would then recommend to their constituencies that they approve it."

But a draft disclosure statement filed Friday along with the adjustment plan also details how the city's plan meets the requirements for a cram-down, which is a request to confirm the plan over the objections of some creditors if at least one class of impaired creditors accepts it. Impaired creditors are those who won't be fully repaid what they're owed.

Andrews said it's possible the pensioners could make up two classes of impaired creditors that vote to accept that plan.

"I think that is a very real possibility, despite what you're hearing right now from unions that are feigning outrage," he said. "Whether it's this week, or shortly afterward, one of the creditors who has a lot more to lose is going to raise some strong objections. And the city is going to want to pick off a consent class to sign off and consent to this deal."

Far from ready

City unions and retirees, for their part, did not yet sound receptive Friday.

"We are greatly disappointed that the (adjustment plan) contains debilitating and unnecessary cuts to accrued pension benefits and know the city can afford much better treatment to the people who have dedicated years of their lives in service of the city," the General Retirement System said in a statement Friday.

"Fortunately, the (plan) is a dynamic document that can be amended as mediation and negotiations move forward."

President Al Garrett of the American Federation of State, County and Municipal Employees Council 25 also decried the plan as a "gut punch" to past and present employees.

"The plan essentially eliminates health care benefits for retirees and drastically cuts earned pension benefits. Retires cannot survive these huge cuts to the pensions they earned," he said in a statement. "The plan is unfair and unacceptable. Every step of the way, Gov. (Rick) Snyder has put his political agenda ahead of the folks that that worked hard for the city."

If members of the pension funds approve the adjustment plan in a timely manner, pension benefits would be about 74 percent funded for General Retirement System and more than 94 percent in the Police and Fire fund. Orr said Friday that, without the state funding or the early approvals, general retirement system enrollees would be less than 67 percent funded and police and fire benefits would be at or slightly under 90 percent of current payouts.

Foundations that have pledged to support the funding plan include the $10.9 billion Ford Foundation, New York; $8.2 billion W.K. Kellogg Foundation, Battle Creek; and the $3.3 billion Kresge Foundation, Troy.